Up close and personal

In this piece, Solicitor Paul Mitchell explains what a personal guarantee is.

What is a personal guarantee?

A personal guarantee is an agreement by an individual (the Guarantor) to meet contractual obligations of another party (the Borrower), in the event that that party fails to do so, and is typically sought by banks and other creditors (each a Lender).

Why would I be asked for a personal guarantee?

It is very common for a Lender to ask for a personal guarantee from the director(s) of a company to which it is providing a loan, which can include any line of credit or banking facility. The personal guarantee forms part of the security to be granted in favour of the Lender, which the Lender requires to protect its position in the event the Borrower defaults on the loan.

Should I obtain Independent Legal Advice?

Lenders are extremely careful to ensure that all parties to any guarantee now take independent legal advice. Lenders require the nature and terms of the security to be fully explained by an independent legal representative, whose services you will be required to pay for, in order to rebut any presumption that they placed undue influence on you to serve as Guarantor.

Some key considerations for the Guarantor

There are a number of aspects that a prospective Guarantor should consider, which include but are not limited to the following:

1. Is it a Guarantee or an Indemnity?

The majority of personal guarantees provide that the Guarantor is liable as a ‘Principal Debtor’, typically called a “Guarantee and Indemnity”. This aims to ensure that a Guarantor remains liable where, had the guarantee been a straight guarantee, the Guarantor might be more readily released from their liability. The key differences between a guarantee and an indemnity are, as follows:

1. 1. A guarantee is a secondary obligation, which means that the Guarantor stands behind the obligations of the Borrower. If the Borrower ceases to have any liability then the Guarantor also ceases to have any liability, and the Lender must always attempt to collect from the Borrower before approaching the Guarantor.
   2. An indemnity is a primary obligation, independent from the obligations of the Borrower, which means that the Guarantor stands beside the Borrower. The Guarantor may still be liable where the Borrower ceases to have any liability, and the Lender could make demand of the Guarantor without ever approaching the Borrower.

2. Does the Guarantee extend to ‘All monies’?

A Guarantee that extends to ‘all monies’ includes all monies and liabilities presently owed to the Lender by the Borrower.More importantly, however, it can include any future monies and liabilities that, for example, the Borrower takes under future loans.

3. Is there a cap on liability?

Liability can either be capped to a certain amount, or it can be potentially unlimited.The Guarantor needs to be comfortable that they can meet the full amount for which they may be liable.

Even where there is a cap, the Guarantor is usually liable for enforcement costs incurred by the Lender in pursuing the debt, and interest is also likely to accrue. As such, the full liability under the Guarantee is not certain and could be a much larger figure than expected.

4. What’s at risk?

A Guarantor’s personal assets are at risk. These can include their family home, even though it may be jointly owned. Ultimately, if the Guarantor was unable to meet any demand called upon by the Lender under the Guarantee, they would be at risk of personal bankruptcy.

Be sure to seek legal advice

With the above in mind, it is always recommended that individuals looking to act as a Guarantor take legal advice, even if this is not required by the Lender, to ensure they are fully aware of potential risks and ways to minimise those risks.

For further information contact Paul or another member of Ashtons’ expert team: John Yatchisin, Mark Watson or Craig Fiddaman.

Disclaimer: This document is for informational purposes only and does not constitute legal advice.